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Trend Following Strategy Based on DMI and RSI

Author: ChaoZhang, Date: 2024-01-25 15:56:41
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##Overview This strategy combines the DMI indicator to determine the trend direction and the RSI indicator to determine overbought and oversold conditions, implementing a relatively complete trend following trading strategy. When the DMI indicator judges that a trend appears and the RSI indicator shows overbought or oversold, long or short positions are taken accordingly. At the same time, a moving stop loss is set to lock in profits.

##Strategy Logic

  1. Use DMI indicator to judge trend direction
    • DMI consists of three lines: +DI indicates uptrend, -DI indicates downtrend, ADX judges strength of the trend
    • When +DI>-DI, it is an uptrend, go long; when -DI>+DI, it is a downtrend, go short
  2. Use RSI indicator to judge overbought and oversold
    • RSI compares average gain and loss over a period to determine overbought or oversold
    • RSI below 30 is oversold, above 70 is overbought
  3. Combining DMI to determine trend direction and RSI for overbought/oversold can better capture market rhythm
    • When DMI shows uptrend and RSI oversold, good timing for long
    • When DMI shows downtrend and RSI overbought, good timing for short
  4. Set moving stop loss to lock in profits

##Advantage Analysis This is a relatively mature and steady trend following strategy with the following strengths:

  1. Combining trend and overbought/oversold avoids frequent trading in range-bound market
  2. Popular indicators DMI and RSI with easy parameter tuning and thorough practical verification
  3. Trailing stop loss locks in profits and avoids stop loss to some extent
  4. Clear and easy rules, simple to implement

##Risk Analysis There are also some risks to note:

  1. DMI and RSI can easily generate false signals, causing unnecessary losses
  2. Improper trailing stop loss setting may stop loss too early or too much
  3. Cannot effectively filter whipsaw markets, prone to being trapped
  4. Trend following fails to exit promptly when trend reverses

##Optimization Directions The strategy can be optimized in the following aspects:

  1. Add volatility filter to avoid choppy market
  2. Combine candlestick patterns to avoid false breakout
  3. Set proper stop loss near key support/resistance to limit losses
  4. Increase machine learning model for trend prediction
  5. Dynamic optimization of DMI and RSI parameters

##Summary Overall this is a relatively steady and practical trend following strategy. By judging trend direction with DMI and overbought/oversold levels with RSI, it captures medium-to-long term trading opportunities. Trailing stop loss locks in profits. The strategy has simple parameter tuning, clear rules and is easy to implement. But risks include being trapped and untimely stop loss. With some parameter and model optimization, performance can be further improved.

/*backtest
start: 2024-01-01 00:00:00
end: 2024-01-24 00:00:00
period: 1h
basePeriod: 15m
exchanges: [{"eid":"Futures_Binance","currency":"BTC_USDT"}]
*/

// This Pine Script™ code is subject to the terms of the Mozilla Public License 2.0 at https://mozilla.org/MPL/2.0/
// © YingYangJPN

//@version=5
strategy("DMI and RSI Strategy", overlay=true, initial_capital=10000, default_qty_type=strategy.percent_of_equity, default_qty_value=10)

// DMI indikatörünü tanımlayalım
lensig = input.int(14, title="ADX Smoothing", minval=1, maxval=50)
len = input.int(14, minval=1, title="DI Length")
up = ta.change(high)
down = -ta.change(low)
plusDM = na(up) ? na : (up > down and up > 0 ? up : 0)
minusDM = na(down) ? na : (down > up and down > 0 ? down : 0)
trur = ta.rma(ta.tr, len)
plus = fixnan(100 * ta.rma(plusDM, len) / trur)
minus = fixnan(100 * ta.rma(minusDM, len) / trur)
sum = plus + minus
adx = 100 * ta.rma(math.abs(plus - minus) / (sum == 0 ? 1 : sum), lensig)
trailing_stop_loss_factor = input.float(0.50, "Trailing Stop Loss Factor", step = 0.01)

// RSI indikatörünü tanımlayalım
rsiLength = input.int(14, minval=1, title="RSI Length")
rsiSource = input(close, title="RSI Source")
rsiOverbought = input.int(70, title="RSI Overbought Level")
rsiOversold = input.int(30, title="RSI Oversold Level")
rsiValue = ta.rsi(rsiSource, rsiLength)

// Uzun pozisyon açma koşullarını tanımlayalım
longCondition1 = rsiValue < rsiOversold // RSI oversold seviyesinin altındaysa
longCondition2 = adx > 20 // ADX 20'den büyükse
longCondition3 = minus > plus

// Kısa pozisyon açma koşullarını tanımlayalım
shortCondition1 = rsiValue > rsiOverbought // RSI overbought seviyesinin üstündeyse
shortCondition2 = adx > 20 // ADX 20'den büyükse
shortCondition3 = plus > minus

// Uzun pozisyon açalım
if longCondition1 and longCondition2 and longCondition3
    strategy.entry("Long", strategy.long)
    

// Kısa pozisyon açalım
if shortCondition1 and shortCondition2 and shortCondition3
    strategy.entry("Short", strategy.short)
    
// Trailing Stop Loss
longTrailingStopLoss = strategy.position_avg_price * (1 - trailing_stop_loss_factor / 100)
shortTrailingStopLoss = strategy.position_avg_price * (1 + trailing_stop_loss_factor / 100)
if strategy.position_size > 0 
    strategy.exit("Exit Long", "Long", stop  = longTrailingStopLoss)
if strategy.position_size < 0 
    strategy.exit("Exit Short", "Short", stop = shortTrailingStopLoss)

// DMI ve RSI indikatörlerini grafiğe çizelim
plot(adx, color=#F50057, title="ADX")
plot(plus, color=#2962FF, title="+DI")
plot(minus, color=#FF6D00, title="-DI")
plot(rsiValue, color=#9C27B0, title="RSI")
hline(rsiOverbought, title="RSI Overbought Level", color=#E91E63, linestyle=hline.style_dashed)
hline(rsiOversold, title="RSI Oversold Level", color=#4CAF50, linestyle=hline.style_dashed)
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